BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: AB 557 Hearing Date: July 1,
2015
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|Author: |Irwin |
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|Version: |May 28, 2015 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: Nonprofit corporations: abatement: dissolution:
surrender.
SUMMARY Creates a streamlined administrative dissolution and
surrender process for nonprofit corporations, as specified.
DESCRIPTION
1. Contains legislative findings regarding the cumbersome and
protracted process involved in dissolving a nonprofit
corporation's affairs and the importance of ensuring that
nonprofits which have been suspended or have forfeited
tax-exempt status are no longer able to do business in the
state or solicit donations from unsuspecting Californians.
2. Provides that a nonprofit mutual benefit, nonprofit public
benefit, nonprofit religious, or foreign nonprofit
organization that has qualified to transact intrastate
business is subject to administrative dissolution or
administrative surrender if, as of January 1, 2016 or later,
the nonprofit corporation's or foreign corporation's
corporate powers are and have been suspended or forfeited by
the Franchise Tax Board (FTB) for at least 48 continuous
months. This administrative dissolution/surrender process
works as follows:
a. Prior to the administrative dissolution or
administrative surrender of the nonprofit corporation or
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foreign corporation, the corporation must be notified of
the pending dissolution or surrender, as follows:
i. FTB must mail written notice to the last known
address of the corporation, as specified.
ii. FTB must transmit the names of corporations
subject to the administrative dissolution or
surrender provisions to the Secretary of State
(SOS).
iii. The SOS must provide 60 calendar days' notice
of the pending dissolution or surrender on its web
site by listing the corporation name and the SOS's
file number for the corporation. The SOS must also
provide instructions on its web site for how a
corporation wishing to submit a written objection to
the pending dissolution or surrender would do so. A
corporation wishing to object must submit a written
objection to the FTB; the FTB must then notify the
SOS that such an objection has been submitted.
b. If no written objection to the dissolution or
surrender is received by the FTB during the 60-day period
to object, the corporation is administratively dissolved
or surrendered.
c. Upon administrative dissolution or surrender, the
corporation's liabilities for qualified taxes, interest,
and penalties are abated; any actions taken by FTB to
collect that liability must be released, withdrawn, or
otherwise terminated by the FTB, and no subsequent
administrative or civil action may be taken to collect
all or part of that amount. Any amounts erroneously
received by the FTB may be credited and refunded, as
specified.
d. If written objection to the dissolution or surrender
is received by the FTB during the 60-day period to
object, the objecting corporation has 90 days from the
date its objection is received by the FTB to pay or
otherwise satisfy all accrued taxes, penalties, and
interest and file a current Statement of Information with
the SOS. If these conditions are satisfied, the
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dissolution or surrender is cancelled. If these
conditions are not satisfied, the dissolution or
surrender occurs on the 90th day following the date of
FTB's receipt of the written objection, unless that date
is extended by the FTB.
e. If the nonprofit corporation or foreign corporation
is administratively dissolved or administratively
surrendered, the liability of the corporation and of the
directors or other persons related to the corporation to
creditors, if any, is not discharged.
f. The administrative dissolution or administrative
surrender of a nonprofit corporation or foreign
corporation does not diminish or adversely affect the
ability of the Attorney General (AG) to enforce
liabilities as otherwise provided by law.
3. Provides, under the Nonprofit Public Benefit Corporation
Law, Nonprofit Mutual Benefit Corporation Law, and Nonprofit
Religious Corporation Law, that, when a corporation has not
issued any memberships, a majority of the directors, or, if
no directors have been named in the articles of
incorporation or elected, the incorporator or a majority of
the incorporators, may sign and verify a certificate of
dissolution, as specified, and may file that certificate of
dissolution with the SOS within 24 months of filing its
articles of incorporation. The SOS must notify the FTB of
the dissolution. Once that certificate of dissolution is
filed with the SOS, the corporation is deemed dissolved, and
its powers, rights, and privileges cease. Notwithstanding
the dissolution of a corporation in this manner, the
liability of the corporation or its directors or other
persons related to the dissolved corporation is not
discharged, and the dissolution of a corporation pursuant to
this procedure does not diminish or adversely affect the
ability of the AG to enforce liabilities as otherwise
provided by law.
4. Requires FTB to abate, upon written request by a qualified
nonprofit corporation, unpaid qualified taxes, interest, and
penalties for the taxable years in which the qualified
nonprofit corporation certifies, under penalty of perjury,
that it was not doing business.
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a. Defines a qualified nonprofit corporation as a
nonprofit public benefit, nonprofit mutual benefit, or
nonprofit religious corporation or a foreign nonprofit
corporation that qualified to transact intrastate
business in California and that either had its tax-exempt
status revoked, as specified, or was never doing business
in California at any time after its incorporation in
California.
b. Defines qualified taxes, interest, and penalties as
minimum franchise tax and associated penalties and
interest for nonpayment of that tax. Qualified taxes do
not include unrelated business income tax (i.e., tax
associated with activities unrelated to the nonprofit
mission of the corporation) or tax imposed on income
sourced in California but not related to business
conducted in California or the interest and penalties
associated with those taxes.
c. Requires the qualified corporation to establish that
it has ceased all business operations at the time of
filing the request for abatement of taxes, interest, and
penalties, and conditions the abatement of taxes,
interest, and penalties on the dissolution of the
qualified corporation within 12 months from the date the
request for abatement is filed.
d. Provides that if the qualified corporation is not
dissolved within 12 months from the date of filing the
request for abatement or restarts business operations at
any time after requesting abatement, the abatement is
cancelled, and the taxes, interest, and penalties subject
to that abatement are treated as if the abatement never
occurred.
EXISTING LAW
5. Establishes the rules for dissolving different types of
nonprofit corporations, as follows:
a. When a nonprofit public benefit corporation or
nonprofit mutual benefit corporation has been wound up
without court proceedings, a majority of the directors
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then in office must sign and verify a certificate of
dissolution stating that the corporation has been
completely wound up; that its known debts and liabilities
have actually been paid or adequately provided for, or
that it has incurred no known debts or liabilities; that
the corporation is dissolved; that all final returns
required under the Revenue and Taxation Code have been or
will be filed with FTB. The certificate of dissolution
must be accompanied by a written waiver of objections to
the distribution of the corporation's assets issued by
the AG or a written confirmation from the AG that the
corporation has no assets. The certificate of
dissolution and attachment must be filed with the SOS.
The corporate existence ceases upon acceptance by the SOS
of the filing. The SOS is then required to notify FTB of
the dissolution (Corporations Code Sections 6615 and
8615).
b. When a nonprofit religious corporation elects to
wind up and dissolve, it may do so either by approval of
a majority of the members or by approval of the board and
approval of the members, as specified. All of the
corporation's assets must be disposed of on dissolution
in conformity with its articles or bylaws, subject to
complying with the provisions of any trust under which
such assets are held. The disposition of assets may be
made without decree of the superior court, if the AG
makes a written waiver of objections to the disposition
of assets. Nonprofit religious corporations are
generally subject to the same rules for dissolution as
nonprofit public benefit corporations, summarized
immediately above (Corporations Code Section 9680).
c. When a foreign corporation that has qualified to
transact intrastate business wishes to surrender its
right to engage in business in California, it must file a
certificate of surrender signed by a corporate officer or
trustee, stating that it surrenders its authority to
transact intrastate business and that a final franchise
tax return has been or will be filed with the FTB, as
specified. The SOS is then required to notify the FTB of
the surrender (Corporations Code Section 2112).
COMMENTS
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1. Purpose: AB 557 is intended to create a process to "rid the
books" of nonprofit organizations that either never launched
or are no longer operational, saving the SOS, FTB, and AG
the time and money involved in attempting to register, tax,
and audit these organizations.
2. Background: Under existing California law, the SOS, FTB,
and AG share jurisdiction over the administration and
taxation of nonprofit organizations. The SOS administers
the incorporation process and ensures that nonprofit
corporations adhere to the missions for which they form.
The FTB evaluates, reviews, and monitors the state
tax-exempt status of nonprofit corporations. The AG
regulates nonprofit organizations that administer or solicit
charitable funds or assets and has broad legal and statutory
authority to commence enforcement actions for improper
activities.
According to this bill's author, the current process to dissolve
a nonprofit corporation is very cumbersome, time consuming,
and inefficient.
In order to dissolve, a nonprofit corporation must first prepare
and file a Certificate of Election to Wind Up and Dissolve.
Nonprofit public benefit, mutual benefit, and religious
corporations holding charitable assets in trust must then
request a waiver of objections from the AG before disposing
of any remaining assets. In order to obtain this waiver,
the corporation must submit information detailing the
persons to whom the remaining assets will be distributed; a
signed Certificate of Dissolution; a copy of the
corporation's federal tax returns for the last three
accounting periods; and an endorsed filed copy of the
corporation's articles of incorporation, including any
amendments. Once it receives a letter from the AG waiving
objections to the distribution of assets or confirming that
the corporation has no assets, the corporation must mail a
final dissolution packet to the SOS, containing the letter
from the AG and the executed Certificate of Dissolution.
Once the SOS processes the corporation's paperwork, the
corporation is completely dissolved, and its corporate
existence ceases in California. However, the organization
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must still submit a final notice of dissolution to the AG.
This submission must include a copy of the Certificate of
Dissolution filed by the SOS or written confirmation that
the Certificate of Dissolution has been filed with the SOS
and the final financial report for the corporation showing
that all assets were distributed properly, resulting in a
zero balance. It is only after this final submission that
the dissolved corporation ceases to be subject to the
minimum franchise tax.
Because of this cumbersome process, it is estimated that close
to 60,000 of the 150,000 nonprofit corporations currently
"on the books" in California are eligible for the
administrative dissolution process that AB 557 seeks to
establish.
3. Discussion: AB 557 is virtually identical to AB 1529
(Perez) from 2013, a measure that was vetoed by Governor
Brown. In his veto message, the Governor stated, "This bill
would make it easier to dissolve a nonprofit corporation.
Implementing this bill, however, will require expensive
reprogramming of an obsolescent computer system that will
soon be replaced. It would be better to make this change
when the new computer system is being designed."
Assemblymember Irwin, author of AB 557, believes that the
May 28, 2015 amendments to her bill resolve the concerns
that led to the Governor's veto.
4. Summary of Arguments in Support:
a. The California Taxpayers Association (Cal-Tax) not
only supports the bill, but urges lawmakers to expand the
administrative dissolution and surrender process to all
legal entities, not just nonprofit corporations, as other
states like Colorado, Georgia, and Missouri have done.
In support of the bill, Cal-Tax observes that "there is a
significant problem with for-profit and not-for-profit
organizations filing incorporation and registration
papers with the SOS, and then failing to launch their
operations without formally dissolving or surrendering.
The result is a massive accounts receivable sitting on
the state's books that will never be collected. To
properly unravel, such entities must spend considerable
amount of time and expense, and go through a cumbersome
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reviver process with the state, and then go through the
dissolution/surrender process. If an entity does not pay
its tax liability, it generally is difficult, if not
impossible, for the FTB to hold individual owners
personally liable for the unpaid tax. Unlike sales and
payroll tax liabilities, the obligation to pay income and
franchise tax begins and ends with the entity in most
circumstances.
"The new administrative dissolution/surrender process to be
created by AB 557 would allow the FTB and SOS to formally
dissolve/surrender nonprofit entities that have been
determined to be inactive. For many of these entities,
their boards of directors disbanded years earlier, but
never took the proper steps to dissolve/surrender the
entity, thus causing years of taxes, penalties, and
interest to accrue. Further, the FTB and SOS spend an
inordinate amount of time and resources administering the
dissolution/surrender process. By streamlining the
process to dissolve/surrender defunct nonprofits, AB 557
would help the FTB and SOS to clear away the backlog of
inactive nonprofit corporations, and save precious state
resources."
b. The California Society of Enrolled Agents writes,
"often taxpayers form business entities that never get
off the ground, sometimes by attending a seminar. The
taxpayers barely remember forming the entities, do not
file the right paperwork to keep the entities alive, and
definitely do not have the funds to first revive the
entity, which must happen in order to properly close the
entity. The cost of revivor, which includes paying the
annual/minimum tax for each year, including penalties, is
too costly for many. Additionally, these 'phantom
receivables' should not be carried in the state's
Accounts Receivable, as most of the accounts will never
prove collectible." CSEA joins Cal-Tax in viewing AB 557
as a good first step to expanding the administrative
surrender/dissolution process to all entities, not just
nonprofits.
5. Summary of Arguments in Opposition: None received.
6. Prior and Related Legislation:
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a. AB 1529 (Perez), 2013-14 Legislative Session:
Virtually identical to AB 557. Vetoed by Governor Brown.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Taxpayers Association
California Society of Enrolled Agents
Opposition
None received
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